8) Tradable pollution permits - MB

Question 1

define pollution permit system

Answer 1

a system controlling pollution based on a market for permits that allows firms to pollute up to a limit

Question 2

define polluter pays principle

Answer 2

an argument that a firm causing pollution should be charged the full external cost that it inflicts on society

Question 3

define property rights

Answer 3

legal control or ownership of a good

Question 4

how do firms get permits?

Answer 4

government issues or sells permits to firms

Question 5

what do permits allow?

Answer 5

firms to pollute up to a limit

Question 6

who doesn’t use all of their permits?

Answer 6

firms with less polluting production techniques or outputs do not use all their permits

Question 7

who uses all their permits and require more?

Answer 7

firms with more polluting production techniques or outputs use all their permits and require more

Question 8

what can less polluting firms do with their left over permits?

Answer 8

they can sell their permits to more polluting firms

Question 9

what is the purpose of the pollution permit system, what does it incentivise?

Answer 9

the system incentivises firms to lower pollution by financially regarding firms that achieve this, and financially punishing firms that don’t

Question 10

overall pollution can be…

Answer 10

capped at a certain level

Question 11

what can happen to the cap for pollution?

Answer 11

the cap can be lowered over time, creating pressure on firms in the market to lower pollution
(also called ‘cap and trade’)

Question 12

what are examples of tradable pollution permits? (3 examples)

Answer 12

EU emissions Trading System (ETS)
California Zero Emission Vehicle Program (ZEV)
Regional Greenhouse Gas Initiative (REGI)

Question 13

what is the EU emissions Trading System (ETS)?

Answer 13

• limits emissions from around 10,000 installations in the power sector and manufacturing industry and airlines operating between countries
• it covers 40% of EU’s greenhouse emissions

Question 14

what is the California Zero Emission Vehicle Program (ZEV)?

Answer 14

designed to achieve the state’s long term emission reduction goals by requiring auto manufacturers to offer for sale specific numbers of the cleanest cars available

Question 15

what is the Regional Greenhouse Gas Initiative (REGI)?

Answer 15

cooperative effort among states in the USA to cap and reduce power sector CO2 emissions

Question 16

how is pollution bad?

Answer 16

as a negative externality it causes external costs on third parties

Question 17

how do tradable pollution permits work?

Answer 17

they allow firms to pollute to a certain limit, for firms to pollute above this limit they must purchase more permits from firms that have not exhausted all their permits

Question 18

what does this potential for profit/decreased costs from tradable pollution permits cause?

Answer 18

creates incentives for firms to cut their pollution perhaps by developing new technology

Question 19

how do tradable pollution permits align with polluter pays principle?

Answer 19

as heavier polluters pay more for the pollution that they cause, and lighter polluters are rewarded financially

Question 20

overtime what can happen to the amount of permits?

Answer 20

the number of existing permits can be reduced, to enforce lower pollution levels

Question 21

what are the advantages of tradable pollution permits? (2 things)

Answer 21

1) creates incentives
2) overall level of pollution is controlled

Question 22

what are the disadvantages of tradable pollution permits? (2 things)

Answer 22

1) must be enforced
2) complex

Question 23

how do tradable pollution permits create incentives?

Answer 23

the incentives to cut pollution are a market-based solution

Question 24

how do tradable pollution permits control the overall level of pollution?

Answer 24

unlike with other policies, this allows a limit on the overall level of pollution

Question 25

why is it a disadvantage that tradable pollution permits must be enforced?

Answer 25

it may be expensive or difficult to enforce the emissions limits

Question 26

how are tradable pollution permits complex?

Answer 26

it may be complex to create and operate the scheme, and incur significant costs on businesses to operate within it

Question 27

why do tradable pollution permits compare favourably to a tax? (2 things)

Answer 27

1) Judgement incentivises firms that can lower pollution more inexpensively to do so, making the solution cheaper for society
2) government doesn’t know the best way to cut pollution, firms do - this incentivises firms to find these methods

Question 28

why do tradable pollution permits compare unfavourably to a tax? (2 things)

Answer 28

1) the ‘correct’ number of permits may be difficult to determine; if too many are issued, pollution is cut slowly
2) (more important) third parties are not compensated for the external costs incurred by the negative externality of pollution